Month: February 2020

Retirement Roundup: 10 Questions Every Couple Should Ask Before Retiring

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A digest of news from publications around the nation about finance, investing, and retirement.

Ask Carrie: 10 Questions Every Couple Should Ask Before Retiring | Parade

In addition to important financial questions to discuss with your partner, this pre-retirement checklist has valuable conversation starters that address the emotional and psychological changes that come with retirement. Among them: How much “togetherness” do you want with your partner?

2020 Presidential Candidates’ Proposed Changes to the Social Security Retirement Program | Center for Retirement Research at Boston College

The Center for Retirement Research at Boston College keeps track of various changes to Social Security proposed by presidential candidates. Of possible interest to PERA On The Issues readers, the list says that Sen. Elizabeth Warren and former Vice President Joe Biden “would eliminate the Windfall Elimination Provision and Government Pension Offset.”

Expensive Health Care? Blame The Hospitals, State Report Says | CPR

Health costs continue to be of concern to many, and costs keep going up. A study conducted by the state’s Department of Health Care Policy and Financing says savings can be found at hospitals. The report says hospitals are shifting costs onto privately insured patients while still collecting billions in profit. Hospitals say shifting costs to privately insured patients is an unavoidable result of public insurance programs that reimburse hospitals at low rates.

The Polis administration just cut $51 million from its budget request for Colorado’s reinsurance program | The Colorado Sun

A drop in funding for a new program often is bad news to program supporters and can indicate a loss of political support. But the reporter in this story says the drop in funding for Colorado’s nascent reinsurance program is a “happy surprise.” Federal funding for the program came in above estimates, so the price tag for Colorado has gone down.

More people are returning to work after retiring—and they’re happy about it | MarketWatch

One common hobby in retirement? Going back to work. While some go back to work for the money, this story highlights those who choose to clock in in order to give back, find meaning, and make a difference.

Colorado PERA Leaders Discuss Investment Stewardship

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Stewardship is a central concept at PERA. It’s a concept that has tangible, observable outcomes when put into practice. This can mean protecting member assets by reducing costs and being cost conscious. It can mean advocating for fair, robust markets. It can mean integrating relevant environmental, social and governance considerations that may be financially material.

PERA On The Issues has reported on stewardship before, including introducing the 2019 Stewardship Report, highlighting the ways in which PERA saves member dollars by lowering costs, and exploring the virtuous cycle a commitment to stewardship can create.

In the video below, PERA Executive Director Ron Baker and Chief Investment Officer Amy McGarrity discuss these and other ways PERA approaches this important topic.

Colorado study sheds light on retirement roadblocks

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Nearly nine in ten Coloradans expect their retirement lifestyle will be similar or better to the one they had during their working years. Yet only 39 percent of Coloradans say they have a clear vision for retirement.

So why aren’t more Coloradans ready for retirement? The reasons stated in a recently released report might be surprising to some. The study makes clear that a lack of investment knowledge and access to employer-sponsored savings plans play a significant role in the gap between retirement dreams and savings realities.

Origins of the study

In 2019, the Colorado Legislature created the Colorado Secure Savings Plan Board to better position Coloradans for a secure retirement. The Board’s eight members include PERA Chief Investment Officer Amy C. McGarrity and Colorado Treasurer and PERA ex officio Trustee, Dave Young.

During the past few months, the Board has reviewed research and presentations from a variety of outside organizations. A study presented by Corona Insights provided a particularly in-depth look at the current retirement landscape in the state, identifying obstacles Coloradans face and possible solutions to address each issue. The Board has not yet made a specific set of recommendations, but this report gives a framework to use as they continue their work.

“The cost of doing nothing is extreme. [Doing nothing] would potentially cost taxpayers billions of dollars.” – Amy C. McGarrity, PERA Chief Investment Officer

This study did not specifically single out PERA members in any way, and the Board’s work is largely geared toward bringing retirement services to those in the private sector who currently lack access to retirement savings opportunities. But PERA members should still pay attention. “The cost of doing nothing is extreme,” McGarrity said. “[Doing nothing] would potentially cost taxpayers billions of dollars.” One study the Board reviewed actually calculated the price for what insufficient retirement savings could cost Colorado taxpayers: nearly $10 billion from 2021-2035. This cost is due to the projected increased need for services and lost revenue.

The report’s primary findings can be summarized into five broad topics:

1. Improve the general awareness about the importance of retirement planning.

Currently, only 56 percent of Coloradans have a financial goal for their retirement savings.

Research often suggests learning about financial concepts early in life helps. To that end, the study recommends supporting financial education for students, educators, and parents. For adults, creating a public information campaign with particular attention paid to low- and middle-income residents could improve outcomes. McGarrity noted that making financial education more widely available is a good first step, but a larger cultural shift is needed for this awareness to truly take root.

2. Make savings systems more widely available, simple, and automated.

The report states that “only 60 percent of Colorado adults under 65 have access to a workplace retirement plan, and only 53 percent use a workplace retirement plan.” Addressing this goal requires making retirement savings more widely available, simple, and automated.

First, people who currently don’t have access to retirement plans must gain access. This issue is black and white. Across the country, households with access to a workplace plan have 790 times more retirement savings than households without access to retirement plans, “even after controlling for characteristics such as age, income, and other predictive factors.” Offering a low-cost, low-maintenance, Colorado-run IRA to those who currently have no other option would be an immediate improvement.

But simply having access to a plan is not enough. An effective retirement savings plan requires opening the account in the first place, contributing consistently, and selecting appropriate investments. Each of these actions can be made easier. McGarrity said that reducing friction, even in small ways such as making enrollment an opt-out process rather than an opt-in process and making target date funds the default investment option, can have a significant positive effect on savings outcomes.

3. Coloradans need to know where to get information they can trust, and employers can serve an important role.

Currently, two-thirds of Coloradans said they want to know more about retirement savings. But many participants shared a suspicion about financial advisors being salespeople rather than advisors.

People are unlikely to act on information they don’t trust. When it comes to financial matters, employers often serve as brokers of trust, which can make them valuable partners. However, the reality or perception of high costs and additional administrative duties leads some employers to forego this opportunity. Creating successful partnerships with employers will require limiting costs and additional work. A state-sponsored advisory program, including online tutorials, could do just that—increase access to financial education without putting an undue burden on employers.

4. Coloradans need help thinking about investing versus saving.

Currently, “45 percent of Coloradans have an investment philosophy that is ‘somewhat conservative’ or ‘very conservative,’” according to the study, and about the same number report not knowing where to invest their savings.

The study states that experts believe “people often are too conservative in their investments under the belief that retirement savings should be ‘safe.’” However, pursuing “safety” in the form of avoiding risk can reduce potential returns, which, counterintuitively, can increase the risk of outliving retirement savings. Instead of pursuing a notion of “safety” by minimizing risk, investors should consider having a diversified portfolio with an overall risk level that’s appropriate to their age and goals.

Choosing an appropriate investment strategy is a highly personal decision, and it can seem complex. But a mix of educational opportunities, trustworthy advice, understandable investment options, and the option to use target date funds are all potential ingredients of a comprehensive solution.

5. Some Coloradans realistically cannot save for retirement.

Currently, 43 percent of Coloradans stated current income levels as a major or moderate barrier to saving for retirement. Additionally, the Colorado Center on Law and Policy estimates that one in four Coloradans live below the subsistence line.

The experts consulted in the study noted that this issue is complex, with causes and solutions extending well beyond the scope of retirement savings. Nevertheless, low income levels do have an effect on the overall retirement readiness in Colorado, and it is a component lawmakers should consider when considering the cost of doing nothing.

How PERA stacks up

PERA’s Defined Benefit and Defined Contribution Plans weren’t studied in this report. But the report’s recommendations can serve as a reference point to see whether PERA’s products and services are in line with best practices.

All PERA members are part of a retirement plan. While this sounds obvious, only 53 percent of all Coloradans have access to and participate in a retirement plan at work.

PERA members have access to an array of retirement information, including free educational opportunities. PERA’s Field Education department holds hundreds of in-person and web-based sessions annually. PERA partners with more than 400 employers across the state to provide on-site and web-based education as well. In 2019 alone, PERA staff conducted 1,715 workshops and presentations at employer locations, reaching 31,636 members.

Finally, PERAPlus provides members with the option to save additional dollars for retirement. “Younger members especially need to take advantage of these additional saving opportunities,” McGarrity said. “They are pretty compelling from a cost perspective.” PERAdvantage target date funds are the default option in PERA’s 401(k), making it simple for members to diversify and use risk appropriately.

What’s next

When the Board’s work wraps up in the coming months, the work that lies ahead for Colorado will just be beginning. The Board does not have the power to create or implement policy. Instead, the Board will present its findings and recommendations to the General Assembly, who can incorporate it into legislation. The details of what legislation might look like are still unknown. But one thing is clear: time matters. “It’s important to act now,” McGarrity said. “We can’t keep putting this off. It’s time to think long-term.” The cost of inaction is too high.

PERA Updates Socially Responsible Investment Fund

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In 2019, mutual funds and ETFs with an ESG focus saw an inflow of more than $20 billion nationwide—nearly quadruple the amount these investment products added the year before. ESG funds (funds whose investment strategy includes environmental, social, and governance [ESG] factors) have increased in popularity during the past decade. At the end of 2019, the value of these funds topped $137 billion. While that number represents only one-tenth of one percent of the $20 trillion invested in all mutual and exchange-traded funds, experts expect ESG growth to continue.

PERA members who have a PERAPlus account have had access to the PERAdvantage Socially Responsible Investment (SRI) Fund since 2011. The fund has two parts: an equity sleeve and a fixed income sleeve. Each sleeve screens investments for various ESG factors. At the end of 2019, PERA replaced both of these with products that have a wider reach and a lower cost.

“We went through each of the DC funds to see if there’s a better way to construct each. Our goal was to make each more efficient at a lower cost.” – Jim Liptak, Director of Equities at PERA

The change to the SRI Fund was the latest in a series of updates to PERAPlus Funds. “We went through each of the DC funds to see if there’s a better way to construct each,” said Jim Liptak, Director of Equities at PERA. “Our goal was to make each more efficient at a lower cost.” (In December, PERA On the Issues covered changes to the U.S. Small and Mid Cap Stock Fund).

The SRI Fund was particularly well poised to benefit, as the still emerging ESG market is quickly evolving, giving investors more and better options.

Change to the Equity Sleeve

One challenge when constructing an ESG fund is choosing which investments count as sustainable or responsible. “Some people have specific issues they’re focused on—but those issues are different for everyone,” Liptak said.

Rather than sort through dozens of industries and tens of thousands of companies, Liptak said his team worked to identify a partner that had a sound methodology, good performance, and low costs when evaluating the SRI Fund’s equity sleeve, which makes up about 60 percent of the fund’s total holdings.

PERA found that partner in BlackRock and its product called the MSCI ACWI ESG Focus Index Fund, which tracks the MSCI ACWI ESG Focus Index. This index is designed to maximize its exposure to high ESG factors.

In addition to preferring this methodology, Liptak said this fund gives investors exposure to emerging markets like China, Brazil, and India, something the other fund did not have. In total, the fund invests in nearly 500 companies. Finally, the costs are lower. Much lower. The annual fees for the equity sleeve of the SRI Fund dropped from 0.30 percent of assets invested to 0.08.

Change to the Fixed Income Sleeve

Like equities, ESG is a relatively new concept in fixed income products. Bessie Conty is PERA’s Manager of Fixed Income and said that the bond market is less diversified than the equity market for ESG products. She said it was exciting to find the product they did, the TIAA-CREF Social Choice Bond Fund.

The SRI Fund had been using a J.P. Morgan Government Bond fund. Conty said the fund didn’t have exposure to corporate bonds. The new fund does, bringing with it an increased potential return profile.

The TIAA-CREF fund focuses on bonds that can show ESG achievements in their industries. TIAA-CREF states that the TIAA-CREF fund has helped:

  • Avoid 69.5 million tons of CO2-equivalent emissions
  • Reduce 71,000 tons of air pollutants
  • Save 5.6 million megawatt hours of energy
  • Add 74,000 megawatts of renewable energy capacity
  • Build 48 LEED-certified buildings

Sustainable Investing and PERAPlus

As Liptak mentioned, some investors may wish to target even more specific ESG factors, or make investment decisions based on some other metric that isn’t represented in PERAdvantage Fund options. Liptak said the TD Ameritrade brokerage window presents the opportunity for PERA members to invest according to their specific preferences. This window allows members to choose among thousands of investments offered on TD Ameritrade’s trading platform.

But those who wish to invest in ESG funds might find the SRI Fund meets their needs. The fund’s annual cost to investors is 0.26 percent of assets invested, below the industry average of 0.35 percent. At the end of 2018, PERA members had about $23 million invested in the fund.

Retirement Roundup: How 10 Types of Retirement Income Get Taxed

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A digest of news from publications around the nation about finance, investing, and retirement.

How 10 Types of Retirement Income Get Taxed | Kiplinger

During your working years, all of your monthly cash flow might come from one source—your paycheck. But in retirement, you might draw income from a handful of sources. That means filing taxes can become more complex, so creating a plan to minimize your tax burden might become even more important. How should you coordinate a pension with 401(k) withdrawals? Should you withdraw from a Roth IRA throughout retirement or save it for later? Whether you’ve been retired for years and just need a refresher or your retirement is just around the corner and you’re curious about what taxes might look like, this article is a good place to start.

Colorado’s Public Option Is (The Big) One Of Many Health Care Fights Lawmakers Will Have This Year | CPR

In the opening weeks of the 2020 legislative session, it’s already clear that health care will dominate headlines. Of the many issues lawmakers are discussing, the creation of a public option takes top billing, according to this article. Insurance Commissioner Michael Conway, said the plan could save consumers 9 to 18 percent in health care costs. Supports say savings can be found by limiting hospital charges, increasing the amount insurance companies spend on patient care, passing rebates from drug companies on to consumers, and increasing competition in Colorado’s 22 counties where residents currently only have one option on the individual market. Amanda Massey, executive director of the Colorado Association of Health Plans warns the plan “will result in a one-size-fits-all approach replacing market choice and competition.” She predicts a public option would result in cost increases for Coloradans who get health insurance through an employer.

Do’s and don’ts of spending wisely in retirement | MarketWatch

You spend a lifetime saving. Switching gears into spending mode can be an adjustment. The author of this article says it’s helpful to think of retirement spending occurring in three phases. Phase one: three to five years of jubilation—increased travel, bucket list items, higher spending overall. Phase two: spending decreases as retirement life normalizes. Phase three: you stay close to home, and spending, except health care, typically decreases. For each phase, the author include tips to reduce the risk of running out of savings too soon.

2020’s Best States to Retire | WalletHub

WalletHub reviewed how each state ranked in affordability, health-related factors, and overall quality of life. WalletHub incorporated 47 different data points to inform their conclusions. Overall, Colorado took silver, finishing behind perennial retiree favorite, Florida. More specifically, Colorado ranked fourth for health care, eleventh for quality of life, and seventeenth for affordability.

Millennials, and Their Attitudes Toward Retirement

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As the oldest millennials begin to enter their 40s, the topic of retirement increasingly becomes an important topic. Understanding such a large number of people—millennials includes everyone between 24 and 39, though those parameters can vary—has limitations. But studying the views, values, and behaviors of different generations can bring insight into what retirement might look like decades from now.

Millennials do care about retirement

It’s easy to find a meme or cultural reference that pokes fun at millennials for valuing immediacy at the expense of planning for the future. But research shows that millennials actually are focused on tomorrow. One study shows that nearly half of millennials have a retirement savings account. Whether that number means the glass is half full or half empty is up for interpretation, but, according to some, it’s at least on par with the generation ahead of them.

Generational differences exist, but so do generational similarities

Separating people into groups might suggest that the differences among them are more numerous and dramatic than they might actually be. Research released last year shows that 76 percent of millennials “discuss saving, investing, and planning for retirement with family and close friends,” which is slightly higher than generation X and baby boomers. They talk with financial advisors at about the same rate as generation X and baby boomers. That being said, more millennials say they are procrastinating on taking necessary action on retirement than older generations.

Millennials also think about long-term issues: They are concerned about their health in old age and place a high value on access to an employer-based retirement plan at the same rate as the other two generations mentioned in the study. Millennials who participate in a workplace retirement plan contribute a median amount of 10 percent of annual salary (however some experts say that millennials should be saving at least 15 percent, due in part to increasing longevity rates).

Millennials value stability, community

A new study about Millennials who work for state and local governments indicate that they value serving their community, as well as the benefits they receive as employees. Nearly 90 percent are “satisfied with the ability to serve the public,” and nearly three quarters said a pension benefit was a major reason they chose their job. Nearly all respondents said pensions provided an incentive to make public service a career, and most are confident they will be financially secure in retirement.

The bottom line for PERA members

It’s never too soon to start planning for retirement, even if the plan gets revised from time to time. This holds true for the more than 80,000 PERA members who are under 40. PERA members automatically make monthly contributions to fund their retirement, and PERAPlus allows members to take control of additional retirement savings. The lifetime nature of a Defined Benefit helps offset longevity risk (outliving retirement income), and being able to continue building a benefit at any of hundreds of employers in Colorado gives people the ability to serve their community, build a career, and feel financially secure in retirement.

PERA’s Chief Investment Officer Addresses Market Drop

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This week has been filled with uncertainty. As details about the current coronavirus outbreak emerge, people everywhere are wondering how this might affect them, their neighbors, and their families.

Amy C. McGarrity, PERA Chief Investment Officer

Before addressing what this means for investors, and PERA in particular, I’d like to acknowledge that the health crisis behind the decline in global equity markets is an issue that goes deeper than money. Our thoughts are with those who have become ill, and our hearts go out to those families who have lost loved ones. We are thankful for the hundreds of thousands of health professionals worldwide who are treating patients, taking measures to prevent the spread of this virus, and those studying ways to combat it.

At PERA, we are acutely aware of the concern our members might have about the increased market volatility brought about by this virus. We are in the business of providing retirement security, and news of market declines can be unsettling. At Colorado PERA, we invest strategically, meaning we remain invested in our primary asset classes throughout the market cycle. In other words, we do not attempt to time the market.

Our strategic asset association is determined by an asset-liability study the Board routinely undertakes. We can’t predict when market volatility will occur. However, we can—and do—incorporate risk into our investment decisions. The most recent asset-liability study, completed in December 2019, resulted in the following strategic asset allocation targets:

  • Global Equities: 54%
  • Fixed Income: 23%
  • Private Equity: 8.5%
  • Real Estate 8.5%
  • Alternatives: 6%

In any given short-term period, the portfolio may perform better or worse than long-term expectations. Downturns are expected, and the swiftness with which they can occur often overshadows the rise in markets, even though positive market environments typically outweigh the negative impact of historical downturns. Global equities[1] have indeed lost 7.7 percent from the beginning of 2020 through the market close on February 27. However, when looking at the 10-year period ending on February 27, the overall return is 8.3 percent.

Instead of trying to predict what the markets will do from day to day, the PERA portfolio is positioned to deliver the expected long-term rate-of-return assumption (7.25 percent) over the long term (30+ years).

The markets don’t always go up. However, we are confident that PERA is well positioned to continue to invest through the ups and downs of the market cycle, providing the opportunity to achieve our long-term goals.

– Amy C. McGarrity

PERA Chief Investment Officer

[1] As measured by the MSCI ACWI IMI (benchmark for PERA Global Equity asset class)

Video: PERA’s Voice is Heard at the Capitol

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Michael Steppat serves as Colorado PERA’s Public and Government Affairs Manager. He tracks PERA-related legislation and provides legislative oversight committees with the information they need, among other duties.

In this short video, you’ll hear from Michael about the importance of PERA’s relationship with the legislature and what life is like for him at the Capitol.

0:26: How does PERA work with the government?

1:11: What factors does PERA consider when looking at new legislation?

1:49: What does a typical day look like for you?